Is Pyramid Schemes being a Curse for MLM and the Direct Selling Industry?

Published by Pradeep K.J on

Have you ever think what is Pyramid scheme. And what are the differences between a pyramid scheme and MLM?

Pyramid schemes can be defined as illegal activities or illegal schemes against MLM.  And also, the Ponzi schemes that work in the MLM model are pyramid schemes. In Some parts of India, it is also called a Money chain program. These schemes are like the other side of the coin. 

Pyramid schemes and other related schemes are always been a threat to the genuine MLM industry. And also, to society.  

  • Why pyramid schemes banned in many countries?  
  • How pyramid schemes are different from MLMs?  
  • Examples of pyramid schemes and money chains?  
  • Are money chain schemes being legal in India?  

Are these questions come to your mind? Then read this full article. This is for you

The main difference between Multi-level Marketing and Pyramid schemes is how they make money also how they distribute money.   

Moreover, the pyramid schemes are more like to be push marketing rather than product or service selling. The company is pushing to add more distributors into the system. The upline distributors pushing downline distributors to add more distributors. 

Do you Know What is pyramid scheme? And how awful it is?  

According to Wikipedia, “A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.  

Pyramid schemes have existed for at least a century in different guises. Some multi-level marketing plans have been classified as pyramid schemes”  

In Multi-level marketing and direct selling, you (the one who enrolls in the system) make money by selling products or services. And also, you get a share of your team performance (Sales).  

But different from the MLM to the pyramid scheme, that is you make money by enrolling new people into the system. The money that earned you is a loss of someone else. 

What is happening in the pyramid scheme? How Does Pyramid Scheme Work? 

Pyramid scheme (Get Rich Quick scheme) structure

The main and only similarity between MLM and pyramid schemes is on recruiting more people to the systems.  

 While in MLM, recruiting individuals to boost up sales. But in pyramid schemes, that are only for earn money. 

 The main highlight is that every pyramid scheme is built to collapse the system and make money as much as possible for the company and top layered leaders. 

These types of systems are common in India during the 2000s and early 2010s. Those are ‘Get rich quick schemes’ also called as Money Chain Schemes  

You are giving an ‘X’ amount of money to a company and the company promises returns with profits within a period.   

in the 33rd level the number of participants would be greater than the world’s population

One of the famous examples is that time is,  

Suppose you are investing 1000 Rs into a company for 10 planted trees which will get sold after few years with an excellent price for timber. And you will get a share for profit. Besides that, if you encourage new investors to the system, you will get extra profit on the basic binary or any MLM plans.  

Such companies are usually using the binary system because it is easier to duplicate. 
On a close look what is happening ;

Pyramid Scheme stage 1

In the first step, you are investing 10000 Rs which is completely profit for the company.  

The second step is you are recruiting 2 persons to the company.  the company is earning 17000 (10000+ 1000- 3000 (binary income for the distributor).

Note: 3000 is an above-average binary income in pyramid schemes. 

Pyramid Scheme stage 2

In the 3rd step, the company is earning 28000 the company.   

4th step will be 40000 from the level itself. Total earnings are 85000 for recruiting 15 individuals or membership IDs into the system. Those Earnings are from scratch for the company. 

Pyramid scheme stage 3

How much would such a company earn after 20 steps… Just imagine…  

 No one ever would balance the referral tree for more than 4 or five levels. Which means less binary income for distributors. Which means more income for the company.  

 The system will always same and the story always changes. The story will replace by some stocks of the company or any cryptocurrency, overpriced wellness products, or whatever it is.  

The above example is a 100% money chain system.  

Those types of companies are always starting to demolish within few years or few months. The company is always had its own targets, and after achieving that, they demolish the company or disappear.  

 At the time of demolition, the number of new entries will be high and the number of people who earned more money than invested capital Is would be very less.  

 They all lose their money.

Let’s find how to spot-out How to identify pyramid schemes companies  

It will hard to find which is good (direct-selling) and which is bad (pyramid scheme) for someone new to the industry. Also, for someone who blindly believes in a pyramid scheme.

All that follows the system or pattern noted below may be a pyramid scheme. Or that matches 2 or more systems; 

  • Exchange or investing of money for money on the basis of MLM compensation plan. (Example that Explained above.)   
  • Companies that selling Overpriced tangible products on the basis of MLM compensation plan.  
  • MLM companies rely more on recruiting than selling goods or services.  
  • The MLM companies have only one mode of income. which is when someone is gets recruited into the team. (which may be in binary, sunflower, or any income system) 
  • Companies that sell goods or services that have no fixed rate for a long period of time (for Example; Shares of the company, Crypto coins, gold, FMCGs) on the basis of the MLM compensation plan.  
  • The MLM company charges money for membership. And working for the profit on the basis of MLM compensation plan.  .  
  • MLM Companies that are selling some special services that a fixed-rate can’t be calculated. Or simply expensive fake services (For example; online IQ test, Personality assessment test, special points for online platforms that can be used partially for exchange of goods …. etc. This list will go on and on). Promoting These by MLM systems.  
  • Companies selling franchisees with the help of MLM compensation plan.  

How to identify a Genuine Direct selling company?

It is really simple if you know what is really a pyramid scheme.  

How to spot a Multi-Level Marketing direct selling company Is that the companies that are selling tangible products or services at a reasonable price with the help of an MLM Compensation Plan.  

If you have a doubt about the product’s quality at any time for the price that you have been paid, then you should reconsider the company’s credibility. 

Checklist for you before joining MLM company or How to Filter Good and Fraud?

  • Is there are any charges for joining? Or there are any membership fees. Companies charge any membership fees are 100% pyramid scheme. Be aware of such companies  
  • Distributor or company representative seeking you don’t have any intention for selling products to you? But Companies which are emphasizing recruiting new individual into the system. MLM system is for selling products or services not only for recruiting peoples. 
  • Is there is any buy-back clause? MLM guidelines gazette on 2016 (India) has stated that there should be a return policy of products for 30 days of time. Legitimate MLM companies offer 80% money for the products returning (Normally, the balance 15-20% is GST and processing fee)  
  • Is the income plan emphasizing only recruiting?  or the income plan is designed to recruit more people than selling goods or services. Don’t engage with such companies. 
  • Will you get a commission on recruiting new members? The major trademark pyramid schemes are this. Don’t ever get a hand with such companies. All that matters is the number of new joining not the quantity of products sold in Pyramid schemes. 
  • Check for whether the company registered under the law or not? You may be surprised to see that, in India, companies are working that not even registered. There are more than 10,000 companies operating, but only less than 1,000 of them have even done basic registration.   
MLMPyramid Scheme 
Legitimacy Legal business model Illegal 
Income Sales Volume Number of new joining 
Joining fee Free (Tiny)High 
products Have products.
Products have a reasonable price 
No products or products are heavily overpriced. 
Working Strategy Recruiting new member for selling product or service Pushing for new joining in the name of ‘get rich quick scheme’ 
Difference between MLM and Pyramid Scheme

The legality of MLM and Legitimacy of Pyramid Schemes or related schemes

Pyramid schemes do not offer any legal protection in any country. And even countries that have approved multi-level marketing have banned pyramid schemes.  

The legality of MLM in India  

MLM has been declared legal in India in 2016 by govt. Of India. Also, India has declared MLM guidelines in 2016 (26th October). India has banned some of the schemes, those are  

  • A pyramid scheme (as described in MLM guidelines 2016)  
  • Money circulation Schemes (As in Prize Chits and Money Circulation Schemes (Banning) Act, 1978) (pdf
  • Ponzi Schemes  
  • Chit funds (Chit fund act 1982)  
Pyramid Scheme from the screenshot of MLM guidelines in India (2016)

Why pyramid scheme collapses at some point ?

“Every product or service fails when there is no customer”  

There is only one way to make money in every type of pyramid scheme. Which is to recruit new members into the system.   

Think that the first member is recruiting 2 members. And new members are recruiting 2 each. If the progression is perfect and balanced, then there is no 34th level. Because the 33rd covers the world’s population. 

If there is no chance for new recruitment, there is no money for the distributor. So, the system collapse.  

What if the first stage is 5 members.  Give a thought to it. The demolition of the system would be much earlier. 

  The people are at the bottom of the system will always lose money. Only top layered members and company are making money  

But in direct selling or MLM, the recruiting is for selling goods or services. If he/she (newly recruited member) is not capable of selling, then there is no value for that recruitment.  


If you are planning to join any MLM company, then check for whether it is a pyramid scheme or not. Because, out of 20 companies, 19 companies are pyramid schemes in India. And the ratio of MLM companies and pyramid schemes is not small. And can be simply concluded as Pyramid schemes will always be a threat and curse for the MLM industry.

For Further Enquiry;

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India, 2,


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